Mellody Hobson: The No. 1 Mistake Derailing Retirement Savings
The road to retirement is filled with potential missteps, but one of the most serious — affecting how you live your golden years if you aren’t careful — is being too conservative with your retirement investments. It’s the biggest mistake Mellody Hobson, co-CEO and president of Ariel Investments, sees retirees and pre-retirees make all the time.
“People think they are winning by not losing when over time it’s not outpacing inflation,” Hobson told Kiplinger.com in an exclusive interview. “You need your money for years, and the only way for it to grow is to have equities. People pull back too fast, too soon.” Pre-retirees, especially those nearing retirement, are guilty of the same mistake, says Hobson. They see the off-ramp getting closer, and they get conservative too quickly.
A healthy mix of equities and fixed income wins the race
Hobson isn’t advocating for retirees to be super aggressive with their retirement investments either. She says retirees should have a well-diversified nest egg that outpaces inflation and can last for what may be 30 years in retirement. After all, at last check, the life expectancy for women in America is 81.4 and 76.5 for men, but people live well past that.
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If you are a retiree, or pre-retiree who has gotten too conservative, don’t panic; you can fix your mistake. But don’t go crazy buying stocks all at once. Either work with a financial adviser to allocate more of your portfolio to equities or consider dollar-cost averaging over six months or a year, says Hobson. This strategy involves investing a fixed amount of money at regular intervals, regardless of how the markets perform.
Beyond dollar-cost averaging, another way to protect your portfolio is the bucket approach to spending, with one bucket for short-term needs, one for medium-term needs, and one for long-term needs. You invest the money in the long-term bucket in growth-oriented stocks.
Hobson’s runner-up mistakes
(Image credit: Mellody Hobson)
Beyond being too conservative, Hobson sees other mistakes retirees make that can quickly derail their retirement, and two big ones are taking a lump-sum payout from their 401(k) when they retire and supporting adult children at their expense.
Take the lump-sum payout for starters. Hobson isn’t saying retirees shouldn’t enjoy their hard-earned retirement savings; quite the contrary, but she does think taking a lump-sum payout means less money growing and compounding to live off later. They could also face a big tax hit if the withdrawal comes from a traditional 401(k), which is treated as ordinary income.
“We have this impulse to buy something, to use that money for a boat, vacation, or something, but that money has to be for the long term,” says Hobson. “You don’t have to buy the boat; you can go on a boat trip. You have to resist the impulses because ultimately you sacrifice your long-term financial security.”
As for supporting adult children in retirement, Hobson says it’s become an epidemic in recent years and, if left unchecked, can severely impact a retiree’s financial security. “You have to get very serious about family members standing on their own two feet, or come up with some kind of clear expectation about what the support needs are long term,” says Hobson. Retirees have to “take the training wheels off.”
It’s never too late
Whether you are being too conservative, indulging a little too much, or feeling like an enabler to your adult children, the good news is that it is never too late to correct course.
That is the message Hobson wants everyone to walk away with. Just because you are in retirement doesn’t mean you can’t make changes, and they don’t have to be big, grand gestures. They can be small bites that add up over time.
“Don’t give up on the opportunity at the point of retirement,” says Hobson. “You are still working toward financial security. There is no real finish line.”
Editor’s note: This article is part of an ongoing series in which we ask influential personal finance figures to share their opinion on the biggest retirement mistake you can make. Other articles feature Suze Orman, Dave Ramsey, Grant Cardone, Ramit Sethi and Farnoosh Torabi.
